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Evaluating how predictable errors in expected income affect consumption

Giamboni, Luigi and Millemaci, Emanuele and Waldmann, Robert (2007): Evaluating how predictable errors in expected income affect consumption.

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Abstract

This paper studies whether anomalies in consumption can be explained by a behavioral model in which agents make predictable errors in forecasting income. We use a micro-data set containing subjective expectations about future income. The paper shows that, the null hypothesis of rational expectations is rejected in favor of the behavioral model, since consumption responds to predictable forecast errors. On average agents who we predict are too pessimistic increase consumption after the predictable positive income shock. On average agents who are too optimistic reduce consumption.

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